Argentina currency rout weigh on market sentiment

Argentina peso plunged 20% overnight due to heavy capital outflow, adding its losses against the greenback to 45% this year.

A week ago, Turkish lira suffered from a similar crisis and triggered panic selling in EM currencies. Argentina central bank’s urgent rescue plan to raise interest rate to an eye-watering level of 60% failed to restore confidence. Investors are pulling out from Latin America’s third largest economy as the country’s solvency is deteriorating against the backdrop of rising USD. Hyperinflation and heavy government borrowing led concerns that the country could face default soon, if they could not get IMF’s approval to release a US$ 50 billion rescue loan.

Regional currency crisis could exert a far reach to the rest of the world, especially to emerging economies that are facing a similar situation – high debt, high inflation and fiscal deficit. Capital fleet into save-havens including US treasuries last night. Dollar index stopped declining and found some support at around 94.6 area. Should the Latin America currency crisis worsen in the days to come, emerging market currency and equities would likely face renewed wave of sell-off. Dollar will be favoured.

US equities retraced from record lows as President Trump’s plan to impose fresh tariffs on $200 billion of Chinese imports next week and threatened to pull out of WTO. Both trade tensions and Argentina’s crisis weighed on market sentiment. The damage, however, is more severe in North Asia rather than North America.

In Singapore, the STI lost 24 points or 0.7% at opening due to above-mentioned reasons. The market has again came to test a key support level of 3,200 points. On the other hand, SGX trade statistics showed that institutional investors flow has flipped to net buy for the first time in four weeks as at 24th Aug, suggesting that ‘smart money’ are back to the market buying on the dips. Among sectors, banks, telos and industrials were institution’s top picks.

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